At least three proxy advisory firms have backed the proposed demerger of the hotel business of ITC Ltd and advised shareholders to vote in favour of the special resolution at the court mandated meeting on June 6.

While InGovern, ISS and SES (Stakeholders Empowerment Service) came out in support of the proposed scheme of arrangement, IiAS (Institutional Investor Advisory Services) advised shareholders to vote against the resolution.

If the resolution is passed with sufficient majority, ITC shareholders will hold 60 per cent direct stake in ITC Hotels (resulting company) proportionate to their stake in ITC Ltd (demerged company) and the remaining 40 per cent stake in ITC Hotels will be held by ITC Ltd. Existing shareholders of ITC Ltd will get one share of face value Re 1 in ITC Hotel for every 10 shares held.

The firms backing the proposed scheme noted that there would be no change in economic interest held by ITC shareholders in the hotels business. They also agreed with the management that the transaction will unlock value for shareholders as they will receive a direct stake in a publicly-traded hotel entity.

The company had maintained that the scheme would ensure that ITC Hotels would thrive and grow in a much faster fashion. The demerger will also improve the return ratio for ITC Ltd as hotels contribute 3.7 per cent of revenue and 17.6 per cent of assets (FY23 numbers).

Where IiAS differs is the proposed structure of ITC Ltd holding 40 per cent stake in ITC Hotels with no clear timeframe for dilution. ITC had defended the structure saying it would give the new entity stability and allow it to harness the institutional strength of ITC and its brand equity and goodwill.

“IiAS believes the proposed structure, while designed to improve ITC’s ratios, provides neither a complete value unlocking for shareholders, nor any material separation of the hotel business from ITC. It also does not reduce the capital support responsibilities of ITC with respect to the hotels business. IiAS recommends voting AGAINST the resolution...” it said in a note.

The firm noted that ITC would continue to hold a 13.69 per cent equity stake in EIH and a 7.58 per cent equity stake in HLV and as such the transaction does not provide a complete exit from the hotels business to ITC’s shareholders.

It noted that with 40 per cent stake, ITC will continue to provide capital support to the hotel business and the board did not articulate a plan for the holding. It argued that ITC should provide greater clarity on the size of the synergies it expects to get from holding 40 per cent. There is also lack of clarity on the terms of brand usage fees between ITC and ITC Hotels.